“Given the amount of capital in the market and the number of buyers in the space, we do think 2023 will be an active year for M&A, though maybe not as active as 2021,” said Crites.
Reagan Consulting is a management consulting firm providing strategic consulting, valuation, capital raising, and M&A services to independent insurance brokers and agents. Crites said overall M&A activity this year has “moderated” as higher interest rates make cost to capital much more expensive.
“Will sellers feel comfortable selling now or waiting? It really depends on where they are,” Crites continued. “But we think today’s market can still provide excellent economic returns for folks that have built their business over 20 to 30 years.”
However, “well-run, youthful and specialized” agencies will continue to do well in the 2023 M&A marketplace. “If you’ve established a history of organic growth, everyone will want a seat at the table,” Crites said.
Organic growth dips in Q3 but still strong for the year
Reagan Consulting also conducts a quarterly growth and profitability survey tracking the performance of brokers and agents across the US. The survey’s latest edition revealed that brokers and agents posted their first decline in organic growth in nearly two years. The organic growth rate was 9.5% in Q3 2022, sliding from its double-digit high-water mark of 10.2% the previous quarter.
“We’ve seen accelerating organic growth up until this quarter. We’re still at nine and a half percent organic growth through the first nine months of the year, but it is a slight decline from the peak that we saw last quarter,” Crites commented.
The loss of momentum could be a sign of economic realities beginning to impact the industry. But brokers and agents continue to set a “blistering pace” in 2022, with nearly half (45%) of respondents in Reagan’s posting double-digit organic growth.
Additionally, only 1.6% of respondents published negative organic growth results, the lowest percentage in the survey’s history – a result Crites calls “impressive” considering the current market uncertainty. Reagan has been conducting the quarterly growth and profitability survey since 2008.
“Some economic slowdown has hampered new business opportunities for certain clients, and that’s led to a slightly lower, but still very strong organic growth rate in Q3,” Crites said.
Among lines of business, commercial property-casualty insurance continues to outperform both personal and group benefits. Agents and brokers in this space reported a median organic growth of 11.8% in the third quarter, record year-on-year growth in Reagan’s survey, though down from a peak of 12.2% in Q2 of this year.
Group benefits insurance brokers and agents boosted their median organic growth of 3.9% in Q3 2020 to 5.8% in Q3 2022. Personal lines are also performing better than they have historically, reporting an all-time-high median organic growth of 5.9% in Q3 2022.
Crites said: “The overall market, global unrest and slower economic growth will continue to trend. We’ve seen a slight decline in organic growth, but it’s still at high levels driven by a strong market in the property and casualty side of the business.”
Insurance talent war is the biggest challenge
Economic headwinds rank high among concerns for independent insurance brokers and agents looking to grow their business next year. But for Crites, the ongoing war on talent could make or break growth opportunities for the industry.
“Finding, developing, retaining and incentivizing key individuals that are driving growth for the organization is our clients’ biggest challenge right now,” said Crites. “Locking key people down and giving them the opportunity to grow their books of business is the most significant issue because it leads to growth opportunities for the firm itself.”
Remote work has also ramped up the talent war, Crites said, as an employee working in Kansas can work remotely in New York.
“If you’re not hiring and recruiting for growth, you’re going have a hard time competing with those that are doing so aggressively and developing key initiatives or niche business in certain industries they excel in,” said Crites.
“That’s what we’ve seen the best firms do well. Finding and recruiting talent, having a game plan for growth, and ultimately giving people the opportunity to grow. It’s a talent game in our industry right now.”
What are your predictions for insurance M&A next year? Share your thoughts in the comments below.